Production - measuring efficiency

It is important that every business makes effective use of its assets. The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology, or to set up and operate a call centre. Another good way to look at how efficiently a business operates is to look at “productivity”.

Productivity measures the relationship between inputs into the production process and the resultant outputs.

Productivity can be measured in several ways: e.g.

Output per worker or hour of labour

Output per hour / day / week

Output per machine

Unit costs (total costs divided by total output)

The unit cost measure is particularly important. A falling ratio would indicate that efficiency was improving.

Why is achieving high productivity important?

Most importantly, a more efficient business will produce lower cost goods than competitors. That means the business can either make a higher profit per unit sold (assuming that the product is sold for the same price as a competitor) or the business can offer customers a lower price than competitors (and still make a good profit/

Investing in production assets (e.g. equipment, factory buildings) is expensive – a business needs to maximise the return it makes on these assets

There are various ways in which a business can try to improve its productivity:

Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively

Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones

More or better capital equipment (this links with the topic of automation)